Devon Energy Reports Fourth-Quarter and Full-Year 2016 Results; Provides Updated Capital and Production Outlook

OKLAHOMA CITY--(BUSINESS WIRE)-- Devon Energy Corp. (NYSE: DVN) today reported operational and financial results for the fourth quarter and full-year 2016. Also included within the release is the company’s guidance outlook for the first quarter and full-year 2017.

Highlights

• Exceeded fourth-quarter production expectations
• Achieved record-setting well productivity in 2016
• Reduced operating expenses in U.S. by 42 percent from peak rates
• Attained $1.3 billion in annual cost savings
• Delivered proved reserves growth at attractive finding costs
• Improved growth outlook driven by accelerated capital investment

“For Devon, 2016 was a transformational year,” said Dave Hager, president and CEO. “We successfully reshaped our asset portfolio to focus on our top two franchise assets, the STACK and Delaware Basin, providing us a sustainable, multi-decade growth platform. With these world-class assets, we delivered outstanding operational performance throughout the year. Our drilling programs generated the best well productivity in Devon’s 45-year history and we maximized the value of every barrel produced with cost-reduction efforts that reached $1.3 billion of annual savings.”

“We also took important steps during the year to strengthen our investment-grade financial position with the timely completion of our $3.2 billion asset divestiture program,” Hager said. “These accretive transactions provided us with the financial capacity to further accelerate investment across our best-in-class U.S. resource plays in 2017 and beyond. This increased drilling activity will continue to rapidly shift our production mix to higher-margin products, positioning us to deliver peer-leading cash flow expansion at today’s market prices.”

Fourth-Quarter Production Exceeds Midpoint Guidance

Devon’s reported oil production averaged 244,000 barrels per day in the fourth quarter of 2016. With the shift to higher-margin production, oil accounted for the largest component of the company’s product mix at 45 percent of total volumes.

Total companywide production in the fourth quarter reached 537,000 oil-equivalent barrels (Boe) per day, exceeding the midpoint of guidance by 2,000 Boe per day. In an effort to maximize profitability, Devon chose to reject approximately 12,000 barrels per day of ethane in the fourth quarter.

Record-Setting Well Productivity in U.S. Resource Plays

The majority of the company’s production was attributable to its U.S. resource plays, which averaged 396,000 Boe per day during the fourth quarter. Production within the U.S. during 2016 benefited from drilling activity that achieved the best new well productivity in Devon’s 45-year history. Led by results from the STACK, Delaware Basin and Eagle Ford assets, the company’s initial 90-day production rates in the U.S. increased for the fourth consecutive year, advancing more than 300 percent from 2012.

The substantial improvement in well productivity was driven by activity focused in top resource plays, improved subsurface reservoir characterization, leading-edge completion designs and improvements in lateral placement.

In Canada, Devon’s heavy-oil operations also delivered impressive results with net oil production averaging 139,000 barrels per day in the fourth quarter. Driven by the industry-leading performance of the Jackfish complex, Canadian oil production increased 14 percent compared to the fourth quarter of 2015.

Reserve Report Highlights Operational Excellence

Devon’s estimated proved reserves were 2.1 billion Boe on Dec. 31, 2016, a 3 percent increase compared to the company’s retained asset portfolio in 2015. Proved developed reserves accounted for 80 percent of the total. At year-end, higher-margin, liquids reserves totaled 1.1 billion Boe, or approximately 55 percent of total reserves.

The most significant reserve growth came from the company’s U.S. operations where proved reserves increased 7 percent to 1.6 billion Boe. Devon’s capital programs within the U.S. added 275 million Boe of reserves (extensions, discoveries and performance revisions) during 2016. This represents a replacement rate of approximately 175 percent (on a retained asset basis). Excluding property acquisition costs, these reserves were added at a finding cost of only $5 per Boe added during the year. These attractive reserve results in the U.S. were driven by new-well activity that achieved record-setting productivity, a materially improved operating cost structure and successful base production initiatives.

In Canada, the company’s heavy oil reserves amounted to 504 million Boe at year end. Beyond proved reserves, tremendous upside exists with Devon’s top-tier Canadian assets, with more than 1.4 billion Boe of risked resource.

Lease Operating Costs Improve by 42 Percent in U.S. Resource Plays

Devon continued to make progress lowering operating costs in the fourth quarter. Lease operating expenses (LOE) totaled $367 million for the quarter and were 4 percent below the midpoint of guidance. The $1.1 billion sale of Access Pipeline in Canada added $28 million of incremental LOE during the quarter. The strong fourth-quarter result was driven by the company’s U.S. asset portfolio, where LOE costs improved by 42 percent from peak rates in early 2015. The decrease in LOE was primarily driven by improved power and water-handling infrastructure, reduced labor expense and lower supply chain costs.

The company also maintained its significantly improved general and administrative (G&A) cost structure in the fourth quarter. Including capitalized costs, G&A expenses totaled $224 million, a nearly 40 percent improvement compared to peak costs in late 2014. The significantly lower overhead costs were driven by lower personnel expenses.

Cost Savings Reach $1.3 Billion in 2016

In aggregate, Devon’s cost-savings initiatives achieved $1.3 billion of operating and G&A expense reductions in 2016 compared to peak levels in 2014.

The company expects these cost savings to be sustainable in 2017 due to structural improvements and efficiency gains within its field operations and corporate support groups.

EnLink Positioned to Deliver Double-Digit Growth in 2017

Devon’s midstream business generated $212 million of operating profit in the fourth quarter, driven entirely by the company’s strategic investment in EnLink Midstream. For the full-year 2016, EnLink-related operating profit expanded to $879 million, a 6 percent improvement compared to 2015.

In 2017, with strong growth expected from EnLink, Devon projects its midstream operating profits will advance to a range of $900 million to $950 million. Based on the midpoint of guidance, this estimate represents approximately a 10 percent increase compared to 2016. EnLink’s growth is derived from an asset base that is positioned in some of the most attractive markets in North America, including the STACK, Midland Basin, Delaware Basin and an NGL business that services end-user demand along the Gulf Coast.

Devon has a 64 percent ownership in EnLink’s general partner (NYSE: ENLC) and a 24 percent interest in the limited partner (NYSE: ENLK). In aggregate, the company’s ownership in EnLink has a market value of approximately $4 billion and is expected to generate cash distributions of around $270 million annually.

Fourth-Quarter 2016 Operations Report

For additional details on Devon’s E&P operations, please refer to the company’s fourth-quarter 2016 operations report at www.devonenergy.com. Highlights from the report include:

• Meramec drilling inventory increases by 40 percent
• Leonard Shale and Delaware Sands resource potential expands
• Staggered spacing tests successful in Eagle Ford
• Jackfish complex delivers record production
• Barnett cash flow generation accelerates

Divestitures and Hedging Position Enhance Strong Financial Position

On Oct. 6, 2016, the company closed on the sale of its 50 percent interest in the Access Pipeline for USD $1.1 billion. This accretive transaction officially completed Devon’s $3.2 billion non-core asset divestiture program.

The majority of divestiture proceeds were utilized to retire $2.5 billion of debt through tender offerings and repayments in the second half of 2016. As a result of the debt-reduction efforts, the company expects its recurring, go-forward financing costs to decline by around $120 million annually, with no significant debt maturities until mid-2021. Devon exited the fourth quarter with investment-grade credit ratings and significant liquidity, which consisted of $2 billion of cash on hand and an undrawn credit facility of $3 billion.

In addition to an investment-grade balance sheet, Devon’s financial position is bolstered by a significantly increased commodity hedging position in 2017. The company currently has approximately 50 percent of its estimated oil and gas production hedged in the upcoming year and will continue to build out its hedging position in the future.

Earnings Beat Wall Street Consensus by 20 Percent

Devon’s reported net earnings totaled $331 million or $0.63 per diluted share in the fourth quarter. Adjusting for items securities analysts typically exclude from their published estimates, the company’s core earnings were $131 million or $0.25 per diluted share in the fourth quarter. This strong earnings result exceeded analyst consensus estimates by 20 percent.

The company’s significantly improved profitability in the fourth quarter was attributable to higher commodity prices and an improved cost structure. These factors also strengthened Devon’s operating cash flow to $536 million in the fourth quarter. Combined with proceeds received from asset sales, the company’s total cash inflows for the quarter reached $1.8 billion.

Devon Positioned to Deliver Peer-Leading Cash Flow Expansion

Detailed forward-looking guidance for the first quarter and full-year 2017 is provided later in the release. In 2017, Devon expects to further accelerate activity in its U.S. resource plays to as many as 20 operated rigs by year end. With this level of planned activity, the company expects to invest between $2.0 billion and $2.3 billion of E&P capital in 2017, with nearly 90 percent of the capital devoted to U.S. resource plays.

Devon’s upstream capital plans are expected to drive 13 to 17 percent oil production growth in the U.S. during 2017 compared to the fourth quarter of 2016, which marks the low point of Devon’s production profile. This resumption of growth in high-margin production will begin in the first quarter of 2017. The operational momentum created by accelerated drilling activity in the STACK and Delaware Basin in the upcoming year is expected to advance light-oil production in the U.S. by approximately 20 percent in 2018 compared to 2017. This rapid growth in high-margin production, combined with a significantly improved cost structure, positions Devon to deliver peer-leading cash flow expansion at today’s market prices.

Non-GAAP Reconciliations

Pursuant to regulatory disclosure requirements, Devon is required to reconcile non-GAAP (generally accepted accounting principles) financial measures to the related GAAP information. Finding cost, core earnings and core earnings per share referenced within the commentary of this release are non-GAAP financial measures. Reconciliations of these and other non-GAAP measures are provided within the tables of this release.

Conference Call Webcast and Supplemental Earnings Materials

Please note that as soon as practicable today, Devon will post an operations report to its website at www.devonenergy.com. The company’s fourth-quarter conference call will be held at 10 a.m. Central (11 a.m. Eastern) on Wednesday, Feb. 15, 2017, and will serve primarily as a forum for analyst and investor questions and answers.

Forward-Looking Statements

This press release includes "forward-looking statements" as defined by the Securities and Exchange Commission (SEC). Such statements include those concerning strategic plans, expectations and objectives for future operations, and are often identified by use of the words “expects,” “believes,” “will,” “would,” “could,” “forecasts,” “projections,” “estimates,” “plans,” “expectations,” “targets,” “opportunities,” “potential,” “anticipates,” “outlook” and other similar terminology. All statements, other than statements of historical facts, included in this press release that address activities, events or developments that the company expects, believes or anticipates will or may occur in the future are forward-looking statements. Such statements are subject to a number of assumptions, risks and uncertainties, many of which are beyond the control of the company. Statements regarding our business and operations are subject to all of the risks and uncertainties normally incident to the exploration for and development and production of oil and gas. These risks include, but are not limited to: the volatility of oil, gas and NGL prices; uncertainties inherent in estimating oil, gas and NGL reserves; the extent to which we are successful in acquiring and discovering additional reserves; the uncertainties, costs and risks involved in exploration and development activities; risks related to our hedging activities; counterparty credit risks; regulatory restrictions, compliance costs and other risks relating to governmental regulation, including with respect to environmental matters; risks relating to our indebtedness; our ability to successfully complete mergers, acquisitions and divestitures; the extent to which insurance covers any losses we may experience; our limited control over third parties who operate our oil and gas properties; midstream capacity constraints and potential interruptions in production; competition for leases, materials, people and capital; cyberattacks targeting our systems and infrastructure; and any of the other risks and uncertainties identified in our Form 10-K and our other filings with the SEC. Investors are cautioned that any such statements are not guarantees of future performance and that actual results or developments may differ materially from those projected in the forward-looking statements. The forward-looking statements in this press release are made as of the date of this press release, even if subsequently made available by Devon on its website or otherwise. Devon does not undertake any obligation to update the forward-looking statements as a result of new information, future events or otherwise.

The SEC permits oil and gas companies, in their filings with the SEC, to disclose only proved, probable and possible reserves that meet the SEC's definitions for such terms, and price and cost sensitivities for such reserves, and prohibits disclosure of resources that do not constitute such reserves. This release may contain certain terms, such as resource potential, potential locations, risked and unrisked locations, estimated ultimate recovery (or EUR), exploration target size and other similar terms. These estimates are by their nature more speculative than estimates of proved, probable and possible reserves and accordingly are subject to substantially greater risk of being actually realized. The SEC guidelines strictly prohibit us from including these estimates in filings with the SEC. Investors are urged to consider closely the disclosure in our Form 10-K, available at www.devonenergy.com. You can also obtain this form from the SEC by calling 1-800-SEC-0330 or from the SEC’s website at www.sec.gov.

About Devon Energy

Devon Energy is a leading independent energy company engaged in finding and producing oil and natural gas. Based in Oklahoma City and included in the S&P 500, Devon operates in several of the most prolific oil and natural gas plays in the U.S. and Canada with an emphasis on a balanced portfolio. The company is the second-largest oil producer among North American onshore independents. For more information, please visit www.devonenergy.com.